TreeHouse Foods, Inc. (THS) Earnings Call Transcript & Summary

Perfect. Thanks, everybody. Welcome back to our fireside chat with TreeHouse Foods. With us today are CEO, Steve Oakland; and CFO, Pat O'Donnell, welcome to you both.

Thank you. It's good to be here.

Thanks for being here. Maybe a good place to start, Steve, you've now been at the helm TreeHouse for over 6 years. Maybe to start, can you shed a little light on sort of what part of the role has sort of lived up to your expectations so far? Which parts may have surprised you? And maybe what you're most looking forward to in the years ahead? .

Sure. I guess if I think about what's sort of lived up to my expectations. And I would argue maybe exceeded my expectations is the private label opportunity. If you think about the private label industry growth has maintained, right? It's been going for some 20 years, but it's maintained through that whole period of time. And more importantly, our retail partners have continued to invest in it, right? We've seen significant investments in new private label launches from the largest retailers to the smallest retailers across the country. So I think fundamentally, the opportunity today is better than it was when I started 6 years ago, right? So that's the thing I'm most encouraged by. What surprised me candidly, how difficult it would be to get the business in the position we have it in today to go from there to here. And COVID in the middle of that was no small thing to get over top of the hurdle. So I think when I arrived, the TreeHouse was much more leveraged. There was very little integration, right? It was -- we had done a number of acquisitions. So I think you remember me talking about 13 ERP systems, 119 distribution points. So it was a business that wasn't designed to leverage at scale. And so it also became very clear really early that we had two very distinct sets of businesses in our portfolio. We had some high cash-generating businesses that were declining, and we had a group of businesses that I thought would make a great public company. They were faster growing, higher margin. And so when we did the divestiture of our Meal Prep segment, we think we really liberated those higher growth, better businesses and what I would consider a better public company. And we also generated a lot of cash there, right? So we also liberated our balance sheet and put us in a position where we can invest both in our infrastructure and in our supply chain and in bolt-on M&A, those kinds. So I'm really pleased with where we are today. It just took a little bit longer took a little longer to get there, and there's a lot of reasons for that. But then then you ask about going forward, quite honestly, we've had a lot to get us to where we are today. I'm excited about the next couple of quarters, and we've got an inflection. I'm sure we'll talk about that. But more importantly, I think we see this higher-growth snacking and beverage business coming out at a time when trends are coming private labels way. And it's going to be really fun to run that. So I'm excited not just about the next couple of quarters, but really about the next couple of years to run the thing.

You've done a lot of heavy lifting, as you mentioned over the last couple of years to really optimize the portfolio, strategically positioning TreeHouse and sort of fewer declining categories. More categories where the company feels it has the right to win and sort of a clear line of sight on how to do so. I guess in what ways have we started to sort of see this start paying off so far?

Most encouragingly, and with all of the disruption going on right now and all of the inflation and all the things we've been through private label has consistently been gaining share in our categories, right? So it gives me confidence that we pick the right set of businesses. And the investments we've made over the last couple of years in our supply chain and in our cost structure, are just starting to bear fruit, right? So those things are just starting to spin that flywheel. So I feel like we've positioned the business in the right group of categories and the IRI data for us to be one of the few segments of food retail that are growing, right? Private label, and those categories, in particular, are growing. I think we got it lined up pretty well. And we've made a lot of investment in those categories. We've done a lot for our supply chain. And now we're leaning in on the commercial side. So that's exciting.

Yes. I mean during the pandemic, obviously, TreeHouse and more broadly, private label, suffered from pretty significant supply chain disruptions. Since then, you invested a lot in order to derisk the supply chain, ensure that in categories where you still operate, you've got greater depth in control, spanning a larger portion of the total value chain. Do you feel like retailers are now more appreciative of those actions that have national scale and greater supply chain resilience. Like where does that come into play in your discussions with your sort of top customers? Or does it?

Well, no, it does, right? I think the pandemic exposed the challenges in our industry, right? We're complex, right? We -- all of private label vendors, we make multiple variations of the exact same thing, right? We -- and so everything has to be custom made. So our relationship with the retailer and the forecasting capabilities, all of those things are critical. So mastering complexity is critical. And I think we saw those that were better at it, and we saw those that were worse at it, right? It also exposed for TreeHouse, where are the places we needed to make investments, right? And so that journey with our retail partners has been a productive one, I think. I mean, it was difficult at moment, no question. But it's been a productive one. And I would say the national retailers really appreciate our capabilities, our capacity and the fact that we can serve them nationally. There will always be for a small retailer in the local market, in one of our categories, there'll be a local vendor that can serve their needs really well. But it's very difficult to do that on a national scale. It's very difficult to do that across multiple categories. And I think we've got ourselves positioned to do that really well right now.

Are you finding a greater percentage of your contracts are now sort of multiyear rather than annual? And is that a longer-term benefit that you're aiming to sort of achieve on the back of having a more resilient supply chain that is better suited to sort of cater to key retailers and in turn, make you the preferred supplier by virtue of aspects outside of just offering a better price point.

Well, here, I would take you back to our strategy, right? If you think about what we did with the divestiture of Meal Prep, we picked higher growth, right, consumer trending categories. And when you pick categories that are growing, that capacity conversation is very different. So the aseptic business, right? There's so much going on in aseptic today. Our capacity in our aseptic plan is really valuable to our retail partners. And so it's in their best interest to lock that up for a longer period of time. Our cookie and cracker business. So some of the businesses where we really are deep and where we have the broad set of capabilities and quite frankly, the cost structure, right? They want to be part of that, and they don't want that to go somewhere else. And so I think we picked growth categories and those growth categories are driving that long-term conversation that longer term. So the value of the capacity we bring and the capability we bring. So there are more longer-term agreements than we've had ever historically.

Last summer, TreeHouse unveiled a multiyear productivity program, which targets over $250 million of cost savings from '24 through '27, I guess what sort of initiatives are you pursuing as part of the program? And now there were several quarters into it, how have things progressed relative to sort of your initial expectations?

Sure. I would tell you a couple of things have gone really, really well. First of all, the supply chain investments, we talked about TMOS, TreeHouse Management Operating System. And I think every company brands its own continuous improvement plan. And we've got fundamentals there that have been proven across a number of the largest CPG companies. The team running that for us has done that at the largest CPG companies across North America and globally actually. So we feel like the work that's going on in our plants is the farthest along, okay? And we're getting capacity and cost structure, and we talk about OEE in our calls, but equipment efficiency. So that flywheel is spinning today. We're also getting some employee satisfaction numbers. We're getting things from our -- those things that are keeping our turnover rates and our plants are less. We're empowering our workforce in our plants, which makes it a better place to work. So a lot of good things going on in our operations. We talked about our procurement savings. The fact that we were multiple organizations, multiple systems, we were so complex. We never had a chance to really consolidate our data and leverage our purchasing scale that is happening as we speak, and we've guided a chunk of that will hit us in the back half of this year. There'll be $50 million of gross savings at our P&L this year, and that's nicely on track. So we're really pleased with that. And then the third leg of it will be the distribution network, that will come as we go forward. We had to disentangle the divestiture, and that is now done. And so we can now build a custom distribution network for our new business, and that we're in the process of building that as we speak.

At the same Investor Day, right, you also unveiled your new long-term sales growth algorithm, 3% to 5% year-over-year. We put you certainly in the upper shine of sales growth among packaged food companies. Maybe you can detail some of the key drivers behind the assumption as well as some of the tailwinds you expect to benefit from what you see in this space today?

Sure. If you go back and you look pre-pandemic, and I mean that seems like forever ago, right? I mean pre-pandemic, is that actually normal anymore? Our categories that we kept, that was their annual growth rates, right? They were 3% to 5% growth categories. So we think we will return somewhere close to that. It's hard to pin exactly what normal will be. But we also think there's opportunities for us to reinvest our capital. So we think we can be at the midpoint of that organically, and then we can top that up by either organically or inorganically investing in capabilities to get us to that top end of that guidance range. So we think the core categories can deliver the midpoint of it, and we think a little bit of investment on our part will deliver the rest of it.

And when you say core categories, is that private label in those core categories?

Yes, private label. And whenever I talk about market share growth, it is our set of 16 categories, and it is private label.

Yes, right. Perfect. We recently saw Walmart launched better goods, right? It's a new sort of elevated sort of private label brand, which represents, I think it's largest private label food launch in some 20 years or so. I guess what's your expectation for how retailers approach to private label could shift over the coming years? And do you feel you're well positioned to take advantage of that shift. Obviously, those retailers that are growing outlets more or at all or those that typically are more store brand oriented private label-centric.

Right. Well, I think if you think about Walmart, they've had a very robust private label program, but it's been great value. And great value is exactly what it what its namesake is, right? It's a great value product. It's a good product, but it's simpler maybe than what their competitive set would be offering from a value-add standpoint from an experiential standpoint, right? I think we've heard them talk about the different consumers that are now searching for value and using Walmart as a venue for that value, right? And so I think this is an opportunity for them to continue to serve that core customer with great value but then also serve the needs of a different customer that's now walking in their building or using their online platforms and give them something that's slightly more experiential. And we're blessed to do both, right? We have big businesses with our value retailers across North America, and we have big businesses with the experiential retailers. I think it gives us a chance to reach deeper into that maybe higher income consumer base and that customer that's looking for that experiential thing, there's no question Walmart brings reach, right? And so I think that will give us just another private label reach into that consumer base.

Closer in achieving the sort of low end of your recently narrowed EBITDA guidance range for the year of $360 million to $380 million still requires very significant step up, maybe it's 30% or so year-over-year EBITDA growth in your fourth quarter right. Can you remind investors why you're still confident in being able to achieve that sort of EBITDA growth in the back half and specifically the fourth quarter?

Yes, certainly. Well, a couple of us have been in this room. I've already heard this today because we had some one-on-one meetings earlier, so I apologize for those folks. But a couple of things needed to be true for our back half and their controllables by TreeHouse, right? First of all, we had to have our supply chain in the right shape. And that centers around our broth facility, right? We had to bring both back up and serve this key season. And we're really pleased with where the broth plant is and the progress we've made there, though. So it's positioned to do what we've guided. So that's great news. But more importantly, the rest of our supply chain is having a record service performance, right? So our service performance across the whole company is the strongest it's been certainly since I've been there and maybe ever, right? So the supply chain is in really good shape. We also had to sign a couple of new wins. We talked about some things in our sales pipeline that were coming in the fourth quarter. Those are done. And so we feel really good about those, and those are in the development stage right now. We're being produced right now. So that's great. And then lastly, the margin pivot that we talked about, a lot of it comes from that $50 million in gross cost savings I talked about. And those procurement things are underway. So we feel like we guided a range that require -- the midpoint required those things to happen, and those were in our control. The consumer has been good to private label lately. We'll see what happens as we go forward. But we feel really good about the range we guided, and we feel really good about the controllables that we have. And I cross my fingers that the consumer continues to come strong. But we think what's in our control is in great shape.

Yes. And you mentioned the broth facility recovery is one of the key drivers, right, of the expected back half inflection. Has everything so far in the reopening of the facility gone according to plan and kind of what drove that issue in the first place? And how do you sort of keep that from happening again? And even if it's in another facilities, another categories.

Maybe I'll step back there. So aseptic capacity, low asset aseptic capacity is incredibly valuable today. There's items like the BellRing brands, and that is all -- and you've seen other public companies. Some opt in, those folks investing in this technology. right? That -- it's a very popular format, and that capacity is very valuable like right now, and I'll get back to that because we've learned that through this process. The factory that we took down last December -- or last fourth quarter, we bought 7 or 8 years ago as a company. It had inconsistent performance through that whole period. And we attempted to use incremental fixes of that. We used outside consultants, all kinds of things. It turned out we had no pathogens. We had no -- we did a big recall because a product, we knew there were irregularities in the product. And we tore the whole place apart. And I make the joke and I apologize for those have heard it, that you can buy happiness, right? If you invest enough money in your aseptic plant, you can get it right, okay. And we've done that. We rebuilt the whole thing, and it required us to literally tear the pipes apart and understand they weren't welded right, that a bunch of the interior work that you can't see from the outside wasn't done initially correct. And so all of those things have been corrected. While we did that, we kept every employee we took them through extensive training, and we've built a knowledge base in that staff that we could have never done if we were running the business, right, if it was on the day-to-day operations. And so as we've started up, there's five lines in that plant, four of them we run every day. And one is a specialty sort of low volume thing. All four of those are running. They're actually running the best performance we've ever seen from that facility. So we are convinced that we put the right people, the right process and the right quite frankly, capital in it to be a great player. Our customers have been on that journey with us, right? They're QA departments. We've had them in the room, and we've actually won new business when they've seen the investment we've done. So that's a long way to say that it was wrong. We fixed it. We have another facility in Richmond Hill, Ontario. And our big question there was, why do we run this one exactly the same and get different results, right? Well, it just wasn't built right. And so that's been corrected, and we feel great about it.

Great. You've highlighted in the past that you believe your normalized annual EBITDA run rate is around $400 million. Your '24 EBITDA guidance implies back half EBITDA in excess of $250 million, even at the more conservative end. Suggesting a full year run rate, maybe of closer to $420 million, even when taking into account the typical 40-60 sort of first half, second half EBITDA skew. So it's $400 million still the right number? Or as you think about it? Or could that annualized normalized EBITDA actually be a bit higher than that now based on what you're seeing in the business?

Maybe I'll touch on that, and I'll ask Pat to touch on part of that, right. I think the most important thing is, look, we exit -- we told you at our Investor Day, we would enter 2024 to $400 million rate. We had an episodic event in our broth business that limited that. And that is the bulk of the difference from that starting date. But maybe I'll let Pat talk about where we are from there.

No. I mean I think you're thinking about that right. So every -- first, we recognize we've got to deliver the third and fourth quarters. And so we're extremely focused on execution into the back half. Now that having been said, everything that we're doing in the back half of this year should benefit us for next year in terms of where we expect to be. And so I think this is the strategy and action that we tried to lay out that we felt like we would be at. So we're controlling the things that we can. We're putting -- we're getting the broth plant up and running. We're maintaining service and the rest of those businesses, and we continue to advance our supply chain savings program, which are driving the majority of the EBITDA uptick you see in addition to continuing to drive the top line. So I think everything we're doing in the back half of this year and executing is going to benefit us in the next year. And I think you're thinking about that the right way.

On your second quarter call, you reaffirmed your expectation for year-over-year volume growth in both your third and fourth quarter, which will represent an inflection into positive territory. On a year-over-year basis following eight consecutive quarters or so of volume declines. How much of this inflection is predicated on expected improvement in sort of current consumer trends, things that maybe are less in your control versus the new distribution wins and things of that nature that you've already been secured that are more in your sort of direct control or you've got much more visibility to.

Yes. So I think the return to service and broth is a major driver. So we ship very little broth in the second half of last year compared to what we expected to be able to do. So that's probably 400 basis points on top line alone, just to get that business up and running. So that's a lap that will come across. We've talked a bit to where we stepped away from some business last year and we say sometimes we don't want to win every bid that we participate in because then I think we don't understand market clearing price. So that's a little bit counterintuitive, but we want to lose a bit or two. And there are a handful of bids last year where we had some folks come in and bid a cost below what we thought was attainable from an execution standpoint. And so we stepped away from some business. And so we're starting to lap that now in the second half of the year. And candidly, a couple of those things that we stepped away from are some of the wins that were seeing come back in addition to some other things that are smaller than our net new businesses for us. So we feel good about what we have in our control to go deliver is how we thought about the back half of the year. And then wherever the consumer lands will be plus or minus a point off of that.

Great. How much of some of the new business you're winning from new accounts -- at least from new accounts versus, let's say, how much of it is a result of sort of expanding the depth of your services within existing accounts now that you've gone through the heavy lifting of improving the supply chain.

Sure. I think we serve virtually every key retailer in North America, right? I mean, I'm sure there's some small instances where we don't do that. So the new business wins are, in many cases, depth, right? If you think about, we invested in seasoned pretzels, right? We've invested in our coffee business. We've invested a lot in our pickle business, right? And so I think we found niches within those things where we can add important new growth opportunities for that retailer and for us in those segments. And then there's obviously key categories I don't think we have a retailer in North America that carries every category we make. So it's a combination of us gaining business in one of our additional categories to an existing customer. But I would say it's probably 70% us gaining distribution of items within existing categories. One of the most encouraging things that's going on. We came out of COVID, obviously, there was a lot of price increase, a lot of price increases going on. Then the customer had a chance to finally bid stuff, they couldn't bid anything. So all of that happened. The conversations now with the retailer are really productive. They're about assortment. They're about do I have the right mix of items in the right categories, am I in the right things? And so I think the retailer has now stepped back with private label and understanding, look, private label is growing, unit growth is elusive right now, as you know, across the box and how do we drive that together. So I think those conversations are driving much of that growth.

I think in your last earnings call, you also mentioned that you were seeing an acceleration in trade down, both to and within even within private label, which is in part what led to the company, I think, to report sales towards the higher end of the quarterly guidance in each of the first 2 quarters of the year. Has that trend continued? The data certainly suggests that it has. But what have you seen with regards to that trend through the first couple of months of the third quarter as well?

I think, look, the consumer is looking for value, right? And I think we've seen it across every channel. We've seen a channel shift, right, to value channels. We've seen a channel shift to some of the hard discount retailers are doing really well, and they tend to be private label-centric retailers. So we continue to see that. I think we talked on our on our call. For example, within our cracker business at some of our value retailers, we're seeing the saltine business grow faster than the entertainer cracker business or something. Now we're seeing new consumers buying our entertainers versus once they would have bought somewhere else, right? So I think that trade down is real. I think we've seen it in all the retailers' reports. And I think we're there to represent both. I think as I spoke in the one earlier conversation, we make that basic opening price point product really well, and we also make those experiential items. So I think we're positioned to do both. But I think the retailer is asking the exact same question you just asked is saying, and that's what drove my comments a minute ago, do I have the right assortment, Am I serving that customer effectively? If not, how can we get me there quickly.

I know it's a smaller part of the business, but what are you seeing in the away-from-home piece of the business?

It is a small piece of our business, but it's soft. Away-from-home is soft, and we're blessed that it's not a big -- we have a couple of key categories where it's doing okay. But it's a bit softer.

And maybe broader -- Steve, you've got a long history in the packaged food industry, both branded and private label, not to date you at all. But we're seeing obviously another round of stepped-up M&A. Growth is a little tougher to come by for a lot of the branded players. Balance sheets are in a better place, there's a backlog of sponsor-owned assets, right, that have been marked down and monetized yet. So I'm really just more curious, not even specific to TreeHouse, but in this type of environment, would your expectation be that we likely are going to see some additional consolidation across the business, even if it's not necessarily to buy growth or accelerate growth, and even if it's just merely leveraging overheads better just to create some flexibility to fuel investment behind your brands or whatever it might be? I'm just curious how your thought process goes there.

Well, I think your comment earlier, there's a lot of sponsor owned assets that need to trade, okay? And they'll either trade amongst the sponsors or they'll trade to strategics, right? And I think we see a lot of those things coming across our desk today. We've seen some dislocation between maybe we see some 2019 price expectations in a different world. But I think those are starting to change, right? So I think those -- I think as values align with the current cost of capital, all of those things, I think those things all align. TreeHouse specifically, it's -- we will continue to execute our strategy, and that is both organically and inorganically invest in depth in these good categories. We bought our coffee facility. We bought those things. It's a lot faster to buy great assets today than it is to build them. It's still really cumbersome and expensive to do construction to do those kinds of things. So we see some bolt-on opportunities that are attractive to us if we can get them to market this in the near term, that would be great. We also have a CapEx budget, as you know, that's a little expanded in the next year or so where we'll continue to invest for growth in our existing facilities.

Maybe lastly, Steve, you hear this a lot from investors as well, right? They understand, well, this sort of structural shift towards private label. They've seen the significant heavy lifting and investment that you guys have done over the last couple of years. Yet they've also seen sort of a bumpy nature, right, of the delivery over the past couple of years. So for someone that's now looking to TreeHouse a fresh, right? Why is sort of this time now one where they can kind of sort of get and have more confidence that all these efforts are now going to start to pay off deliver kind of on your expectations back harder this year and more importantly, going into '25 and beyond.

First of all, you're absolutely right. This has been an incredibly difficult business to run through all of those things. I'd love to blame hyperinflation. I'd love to blame COVID, all those things, but the reality is we're responsible with running it, right? And so I think we have put the business in a place where it could make the investments necessary to take a number of those things off the table, which is the supply chain resiliency, which is the cost structure, which is the systems pieces. And so -- and I think we've put a commercial organization. I was hesitant to invest a lot in our commercial organization until I was convinced that I had a supply chain that was robust enough to support them. You can't get new business with a customer or not serve it, right? We're so confident in what's going on in our plants today, we've invested in a much more aggressive commercial team. So I think we now have both the internal assets and the people on top of those assets to drive that business more consistently. And we have -- we're in much better categories. If you're the best operator in a tough category, it can be a tough business. We're a great operator today, I think, in a much better set of categories.

Great. Good. Well, I think that's a great place to leave it and head over to the breakout. Please join me in thanking Steve and Pat of TreeHouse.

Thank you.

Thank you.